Fluor Corp. Outlook Revised To Negative On Lower Earnings Guidance For 2019, Ratings Affirmed

  • Although Texas-based Fluor Corp.'s project backlog remains strong at $39 billion, the company incurred additional project charges in the first quarter and lowered its earnings guidance for 2019 following a challenging 2018.
  • We are revising our outlook on Fluor Corp. to negative from stable and are affirming our 'BBB+' issuer credit rating on the company.
  • At the same time, we are affirming our 'BBB+' issue-level rating on its unsecured debt.
  • The negative outlook reflects that recent project charges and anticipated delays in new project awards will cause the company's operating performance to be weaker than we previously expected in 2019. Although we expect that Fluor's cash flow will improve somewhat over the rest of the year, with a free operating cash flow (FOCF)-to-debt ratio of more than 25%, its headroom under this ratio has decreased, which will reduce the company's ability to absorb working capital swings or further unexpected operating challenges.
NEW YORK (S&P Global Ratings) May 8, 2019—S&P Global Ratings today took the rating actions listed above. Fluor reported additional project charges in the first quarter of 2019 after recording a number of project charges in 2018. The project charges in the company's energy and chemicals segment stem from revisions to its forecast for an offshore project as well as the resolution of close-out matters with one of its customers. The company also incurred further charges related to its legacy gas-fired power projects. Additionally, we now assume that earnings from a number of the company's new awards will be delayed into 2020. As such, we believe its cash flows and credit measures will weaken in 2019 before improving at a more gradual pace than we had previously anticipated in 2020. On a positive note, the company's backlog remains strong at $39 billion, which bodes well for its future revenue.
The negative outlook on Fluor reflects that recent project charges and anticipated delays in new project awards will cause its operating performance to be weaker than we previously expected in 2019. Although we expect that the company's cash flow will improve somewhat over the rest of the year, with a free operating cash flow (FOCF)-to-debt ratio of more than 25%, its headroom under this ratio has decreased, which will reduce its ability to absorb working capital swings or further unexpected operating challenges.
We could lower our ratings on Fluor over the next 24 months if we believe its FOCF to debt will remain below 25% or its debt to EBITDA increases above 2x. This could occur if there are further unexpected cost overruns on large projects or if the company's surplus cash balances decline because of, for example, working capital uses. Alternatively, we could lower our ratings if the company undertakes meaningful shareholder rewards.
We could revise our outlook on Fluor to stable if we believe that its credit measures will improve over the cycle, with FOCF to debt of consistently above 40% and adjusted debt to EBITDA of less than 1.5x.
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